Earnings Call: H1 2021

Nov 22, 2020

day, and welcome to the Metro Performance Glass Half Year Results Announcement. Today's call is being recorded. At this time, I'd like to turn the call over to Simon Mander. Please go ahead. Thank you. Good morning, everyone. Welcome and thank you for joining our call today. My name is Simon Mander, and I'm the CEO of Metro Performance Glass. And with me is Brent Nellings, our CFO. This morning, we will provide you with an overview of the group's results for the 6 months to 30th September, 2020, and then we'll be happy to take any questions. Moving on to Slide 2, we've noted 4 key messages, which summarize the half. I'd like to start by recognizing the strength and dedication of our people right across the MetroGlass Group. The emergence of the COVID-nineteen pandemic has presented significant challenges for our teams and their resilience has ensured that we've continued to deliver our market leading products and services to our customers. We had a solid first half in New Zealand, although the COVID-nineteen shutdown impacts at the start of the financial year overshadowed underlying performance. Australian Glass Group progressed well on the turnaround plan with good operational performance and pleasingly delivered an EBIT positive result for the first half. And finally, as a group, Metro Glass has continued to significantly reduce its bank debt through strong operating cash flows and targeted capital expenditure. Turning now to Slide 3. We outlined some of the COVID-nineteen related issues we have faced over the 1st 6 months of FY 2021. Sitting here in November, it's vastly different to how we started the financial year with our New Zealand based operations closed from late March to the end of April, as we covered in some detail at the ASM in August. We committed early to paying 100% of our staff's contracted wages and salaries for the 5 week period of Alert Level 4. We were very focused on supporting our customers as much as possible, for example, with emergency glazing work and regular communications. We controlled our costs across the group with discretionary costs and capital expenditure down materially. In Australia, restrictions have generally been less onerous and we've been able to operate relatively normally throughout this calendar year. On slide 4, we present our key financial results for the year. Our group results were primarily impacted by the shutdown and subsequent ramp up period in New Zealand, both pleasingly partially offset by the improved performance in Australia. New Zealand revenue of $89,200,000 was down 19% versus the previous comparable period with an EBIT before significant items of $12,800,000 down 26%. Trading volumes from June onwards were largely in line with the prior year. However, this could not offset the impacts from the Alert Level 4 lockdown with more revenue in April and significantly reduced revenue in May. Australia Glass Group's revenue grew by 3% to 27,800,000 dollars but the big turnaround was at the EBIT level where a $2,300,000 loss in the prior comparable period improved to a $400,000 EBIT profit this half. Our Australian manufacturing plants have remained operational throughout the first half with the business now delivering strong and consistent operational performance that has been recognized by the market. Group EBIT of $12,800,000 includes the New Zealand and Australian segmental results as well as group costs of $400,000 and you will find further information on this in Note 2 of the financial statements. We have continued to strengthen our balance sheet with net bank debt declining by $25,700,000 year on year to $47,700,000 This was supported by $4,600,000 reduction of working capital, the sale and leaseback of 2 thirds of our vehicle fleet and a reduction in capital expenditure. We remain committed to reducing the company's leverage ratio to below 1.5 times net debt to EBITDA on a pre IFRS 16 basis. And we are pleased with the progress being made. Once this is achieved on a sustainable basis, the Board will consider the resumption of dividends to shareholders. As you can see on slide 5, on a 9 month lag basis, new residential consents grew 8.1% between March 2020 September 2020, reflecting strong consent activity in the second half of the twenty nineteen calendar year. Since the start of this year, despite the onset of COVID-nineteen, consent have continued to track at a fairly consistent level. Total floor area consented has increased 3.9% in the same period. The mix of consent continues to shift towards multi residential dwellings with detached housing consents growing 3.9% on a 9 month lag basis compared with 14.9% in multi residential. Non residential has declined 7.6% in the 12 months of September 2020 compared with the prior year. Seasonally, Metro Glass Commercial Glazing forward books have increased 29% over the same period, in part due to the shutdown period, but also reflects our improved operational performance and acceptance rates. Turning now to slide 6. In New Zealand, Metro Glass has responded well to numerous challenges this year with significant levels of demand uncertainty and volatility, supply chain disruptions, operating restrictions and increased levels of competition. While Metro Glass were able to ramp up sales to similar levels to last year from June onwards and the receipt of the New Zealand government wage subsidy, this was not enough to offset the impacts from the alert level for a lockdown. We remain firmly focused on our customers and our people making good progress with both. I'm particularly proud of our apprenticeship scheme in which we now have more than 80 apprentices enrolled. Looking at slide 7 briefly, the Australian Glass Group is primarily involved in the new detached houses and alterations and addition segments in our key Southeastern Australian markets. Following 18 months to 24 months of declines, housing approvals have begun to flatten and increase and we look forward to these intentions flowing through to activity in glass demand. On slide 8, in Australia, we continue to see the demand for double glazing increasing with our sales increasing by 18% versus the same period last year in this segment. This increase in penetration has been supported by regulatory changes introduced in June 2019 for new commercial buildings as well as the planned changes to be introduced in 2022, 2023 for residential. Overall, percent year on year, inclusive of a decline in sales with other glass products following the restructure of our New South Wales business in December 2019. AGG delivered a positive EBIT for the first half of the FY 2021 and we believe that the business is on a strong footing with the positive long term outlook. I'll now hand over to Brent to discuss the financial results in more detail. Thanks, Simon, and good morning, everyone. On Slide 9, we break our revenue down in New Zealand. You can see that commercial glazing sales declined by 21% to $18,000,000 and the residential segment declined 21% to 59,100,000 dollars These declines were primarily driven by the shutdown period and increased competition in our residential segment. Retrofit revenue grew 2% despite the shutdown period with an increase in inquiry levels as our customers elected to invest and upgrade their properties. Slide 10 reflects our half year results. I'll draw you to the segmental results on the right hand side of the page. The impact on New Zealand's gross profit margin was driven by the reduced revenue in April May with gross profit margin from June onwards largely in line with the prior year. In Australia, gross profit margin increased to 26.3% benefiting from the restructure of the New South Wales business in December 2019. Turning to the group results on the left hand side, net profit declined by 2% overall to $7,600,000 in the 6 months, benefiting from a $1,000,000 one off gain on sale relating to the lease of the vehicle fleet. I'd like to now move on to the Waterfall's slide 11. Movements in New Zealand's EBIT results are shown in the gray shading area where you'll see we've tried to dimension the impacts of the shutdown period. Our New Zealand EBIT result in April was $8,800,000 lower than the prior period as a result of the shutdown, albeit partially offset by the New Zealand government wage subsidy. The following 2 red bars are mainly as a result of the May ramp up period where revenue was 25% below the prior year. We've been very focused on our cost base and achieved some material cost savings year on year in distribution and glazing and administration sales and marketing expenses during the period. Turning to the Australian performance, which is in the green shaded area of the waterfall. The big story here is the gross profit margin improvement and reduction in administration expenses, which primarily arose as a result of the restructure of our New South Wales business. Turning to the balance sheet on Page 12. The group achieved significant reductions in working capital, down $4,600,000 compared to the prior period. This was achieved through close management of our trade debtors and inventory in both New Zealand and Australia. We do expect some of the inventory working capital savings to unwind in H2 as we are now in the process of increasing our safety stock levels to help manage the international shipping disruptions. Pleasingly, net bank debt decreased by $25,700,000 year on year, supported by strong operating cash flows, reduced working capital and targeted capital expenditure and the sale and leaseback of 2 thirds of our vehicle fleet. Our accounts now reflect $3,300,000 of non bank debt borrowings, which primarily relates to the IFRS 16 accounting treatment of the sale and leaseback transaction. Net debt to EBITDA is now at 1.53 times as at the end of September. Also note the restatement of our 31 March 2020 financial statements to reflect a historic $1,400,000 annual leave provision error arising from the implementation of a new payroll system in September 2019. We provided details of this under note 9 of the interim statements. While disappointing this had no cash impact and no impact on payments or entitlements of our staff. Slide 13 demonstrates our continued commitment to net bank debt reduction. We think this has been an important achievement to date, which ensures the group is well placed to adapt and take opportunities in the future. I'll now pass back to Simon to pick up on the outlook for the second half. Thanks, Brent. Turning to slide 14 and our outlook for the 2021 financial year. Reflecting the significant level of uncertainty the group facing, we now anticipate providing guidance on expected results for FY 2021 alongside a trading update in February 2021. However, there are some comments we'd like to make. Firstly, consenting activity in New Zealand has been stronger than we had anticipated in recent months. However, there are some risks that building activity begins to soften early next year as a result of broader macroeconomic factors as well as local issues like extended border restrictions and further weakness in business confidence in labor markets. Balancing this, we've been pleased with the solid results in New Zealand in recent months. Our customers are typically citing good forward books of work through into the new calendar year. The industry is currently experiencing significant disruptions and delays in international shipping, resulting from a surge in sea freight demand and backlogs of key ports. We're monitoring this situation closely and are increasing our safety stock levels as appropriate. However, we are anticipating an increase in shipping related costs in the second half. These factors will impact the level of net debt reduction achieved by the end of the financial year. In Australia, we remain confident that the improvements in Australian Gas Group's EBIT results achieved in the first half will be sustained through FY 2021, but weighted towards the first half given the Christmas and New Year shutdown period. These comments also assume no material change to the prevalence of COVID-nineteen or related restrictions. Metro Glass' strategy and focus remain unchanged as we continue to build resilience and defend our leadership position, sustain a positive trajectory in Australia and benefit from growing demand for double glazing there and prioritizing debt reduction to provide increased optionality for the future. So that brings us to the end of our presentation. We're now really happy to answer any questions that you may have. Thanks. Thank you. We'll take our first question from Good morning, Simon and Brantford. Steve Hudson here from Macquarie Securities. Just a couple of quick ones for me. I think you talked about the reduction in the New Zealand revenues arising as a result of the mix of competition and the lockdown. I just wondered if you could give us some idea of perhaps the split there, given one is sort of a recurring issue, I suppose, and one is not hopefully. And secondly, you also talked about some cost savings that you believe have been made that will be enduring, particularly in New Zealand. So I just wondered if you could contextualize those and give us some idea about what nature of those cost savings are? Yes. So I mean, it was a little bit hard to hear at the start of the question. I think were you interested in can you just repeat the first part of the question around the revenue? Was it muffled, sorry? Sorry about that. You were just talking about the revenue reduction in New Zealand being a mix of competitive issues as well as the lockdown. Can you give us sort of a split there in terms of one impact over another? Yes. I think if you just think about we show that the ASN, April revenue was essentially 0 in New Zealand. So that's 1 6th of the half. And then in May, we were down 25% just as production started the supply chain started back up in the industry. So if you have a look at that and do the math on that, you can sort of see the impact there as we detail on Slide 9. Commercial and residential both impacted about the same. So yes, it's overwhelmingly the reduction in revenue is heavily, heavily weighted to that April close and in the May start up. On the cost side? Cost side. Yes. So I think it's fair to say there is a mixture of one off impacts that we that you would just anticipate through a number of spin controls that we put in place post the April impact. Through May, we haven't differentiated, I guess, from a cost base perspective as we have done in the slide with the waterfall. But so if you think about the admin side of it, we achieved a $1,600,000 year on year improvement or reduction. We're talking high level here, but what we're thinking is that we would be 0.6 of that I'd suggest would be sort of what I'd call 1 off style impacts. But we'd certainly be aiming to lock in $1,000,000 from that into our future business planning. We also had within factory labor, which is partly why we're seeing our gross margin, gross profit hanging in there and being quite solid. We've had some quite good improvements in the wages efficiency area in the factory. So that's helped to support our margin delivery and we expect that that is ongoing and locked in. And anything else particularly, I'm just going to think now, anything else on that that you're interested in or? No, no, that's useful. I suppose any indication that you've dropped off any sort of unprofitable shifts or I suppose you've given us an indication there that or to what extent you've marketing costs have been have come off but are expected to come back on. Would you suppose we're just trying to work out what the nonrecurring elements both in the revenue and the cost line are. So any sort of help in that respect is useful? Yes, that's fine. I mean, certainly from a I mean, the other thing to keep in mind around the shift patterns is that we have done we did do quite a bit of work at the back end of last calendar year as we lead into the shutdown period in Highbrook here, but also in Christchurch. And I would say that we would be very focused on how we optimize those shift patterns. And it's good and we're obviously very pleased to see that we've seen the benefit of that coming through now. Thanks very much, We'll take our next question from Hi. This Grant Lowe from Jarden. Just a couple of quick questions for me. I'm just wondering where we think that the Australian gross margins might be able to get to. Obviously, as the business grows over there, we've seen some pleasing improvement there. Just wondering where that might get to in, say, the next 18 months or so. And just wanted a bit of flavor around the forward order books for each of the divisions around how they might sort of compare to this time last year? So just go back to your first question, Grant, in relation to Australia and the gross margin. Yes. We'd be seeing those as volume growth there. We'd be seeing those margins lifting and improving. The real story in Australia is growing that volume through particularly our New South Wales plant and also through Australia and to a lesser extent proportionately through Melbourne. So they'll be lifting as that volume grows. That's the key there. Yes. And so I didn't hear the second part of your question just talking about Sorry. Yes. Just on the gross margins, I'm wondering if you've got a view as to what sort of level those might be able to get to in the next 12 or 18 months? And then the second question was just around forward order books versus this time last year? Look, to be honest, I think we hadn't felt like our Australian business is operating at a point where we would be able to confidently say where we believe our margin should be operating at. It's still a trajectory of turnaround and we're still not whilst we're very happy with the year on year improvement, which is obvious, we still think that there's more room to move and obviously we've got a trajectory for better growth and better profitability because it's still not where we want it to be. But I'm not sure that we've necessarily landed on where we think it should be at a sort of year on year basis when it would be sort of operating on a normal level. Yes. So as to forward books, we have in our glazing side of the business, it's got a strong forward order book. We mentioned the number here in here on how much up that is on last year. So that's a good level of work ahead of us there. And same in our retrofit business, we've got a good level of work ahead of us there through into the New Year. So that's very pleasing and that side of the business is operating well just reflecting just the work we've been doing there about improving the customer service and standardization of how we operate there. On the window fabricator side, we have a mixed level of forward visibility there from the customer base. It's a very diverse group. And some people are only talk about 4 to 6 weeks out, other people talk 3 to 6 months. So it's really variable. I think this time of year, people are very focused on delivery through to the Christmas, New Year shutdown. There's work around in the New Year, but there's always a bit of uncertainty in January as to how the industry will restart with that holiday period. That's great. Thank you. There are no additional questions in the queue at this time. Okay. Thank you very much everyone. Appreciate your time. That concludes today's call. We appreciate your participation.